Time Series Analysis

Time series Analysis:

Statistical analysis for the set of numerical data
collected or arranged chronologically(i.e.
arranged according to time)
 Importance of Time Series Analysis

• Forecasting:
• Two common approaches of Forecasting:
– Qualitative forecasting(i.e. subjective approach of
forecasting based on previous information)

– Quantitative forecasting(i.e. more of objective based

on historical data arranged chronologically)
 Two types of Quantitative forecasting
methods:
• Time series forecasting: involve forecasting future values
based entirely on the past and present values of the variable.
Example: Daily closing price of particular stock in a certain
company, consumer price index(CPI), Gross Domestic
Production(GDP), etc.
• Causal forecasting methods: involve the determination of
factors that relate to the variable you are trying to forecast. These
include multiple regression analysis with lagged variables,
econometric modeling, leading indicator analysis, diffusion
indices, other economic indicators, etc.
Component Factors of Time Series Models:

• Trend
• Cyclical effect
• Irregular or random effect
• Seasonal effect
 Methods of measuring trend

• Graphical method or free hand curve method

• Method of semi-averages
• Method of moving averages
• Method of curve fitting by OLS method
 Curve fitting by OLS method
Linear trend: Yi  b0  b1 X i

Quadratic trend: Yi  b0  b1 X i  b2 X i
2

Exponential trend: Yi  b0b1 X i

Transformed exponential model:

log(Yi )  log(b0 )  X i log(b1 )
 Example:
Year Revenue
2001 18.0
2002 18.5 Use SPSS to fit straight line trend,
quadratic trend, etc.
2003 18.9
2004 18.8
2005 19.8
2006 20.5
2007 20.1
2008 19.6
2009 21.0
2010 21.9
2011 23.1
2012 24.1
2013 28.9
2014 31.9
What would you do to get a better overall impression
of the pattern of movement in the data over time?

• You can use

– Moving average
– Exponential smoothing
 Exponential Smoothing(ES)

• ES consists of a series of exponentially weighted moving

averages
• The weights assigned to the values change so that the
most recent value receives the highest weight, the
previous value receives the second highest weight, and
so on with the first value receiving the lowest weight.
• Throughout the series, each exponentially smoothed
value depends on all previous values, which is an
advantage of ES over the method of moving averages
 Equation for Exponential Smoothing Series in
any time period i

E1 =Y1
Ei = WYi  (1  W ) Ei 1 , i  2,3, 4,....

Where
Ei = Value of the exponentially smoothed series being computed in time period I
Ei-1 = Value of the exponentially smoothed series already computed in time period i-1
Yi = Observed value of the time series in period i
W = Subjectively assigned weight or smoothing coefficient(0 < W < 1). Although W can
approach 1.0, in virtually all business applications, W <= 0.5
 How to choose weight?

• It is somewhat subjective.
• If the goal is only to smooth a series by eliminating
unwanted cyclical and irregular variations, select
small value for W(closer to 0)
 Exponentially smoothing of yearly
revenue data(W = 0.25, 0.50)
year revenue ES(0.25) ES(0.50) year revenue ES(0.25) ES(0.50)
1982 1588 1588 1588 1996 1865 1724.32 1803.66
1983 1558 1580.5 1573 1997 1637 1702.49 1720.33
1984 1753 1623.625 1663 1998 1653 1690.11 1686.67
1985 1408 1569.719 1535.5 1999 1699 1692.34 1692.83
1986 1310 1504.789 1422.75 2000 1698 1693.75 1695.42
1987 1424 1484.592 1423.38 2001 1523 1651.06 1609.21
1988 1677 1532.694 1550.19 2002 1557 1627.55 1583.10
1989 1937 1633.77 1743.59 2003 1795 1669.41 1689.05
1990 1685 1646.578 1714.30 2004 1934 1735.56 1811.53
1991 1488 1606.933 1601.15 2005 2125 1832.92 1968.26
1992 1562 1595.7 1581.57 2006 2543 2010.44 2255.63
1993 1619 1601.525 1600.29 2007 2616 2161.83 2435.82
1994 1687 1622.894 1643.64 2008 3191 2419.12 2813.41
1995 1841 1677.42 1742.32
 3500 Exponentially smoothed revenue(1982-2008)

3000

2500

2000
Revenue

revenue
ES(0.25)
1500
ES(0.50)

1000

500

Year
 Use Excel for smoothing?
• Class work/Home work
 Least square Trend fitting and
Forecasting
• Linear trend
• Quadratic trend
(Excel/SPSS solution ???? To be discussed in
class
• References:
- Levine, Stephan, Krehbiel and
Berenson(2012): Statistics for managers Using
Microsoft Excel. PHI Learning Pvt. India